Tax levels

Death and taxation may be certain, but what about the tax level? The answer to that depends more on social status and where you work.

The OECD’s latest annual compendium of tax data, Taxing Wages, shows that single-earner married couples with two children still pay most tax on average earnings in Turkey, Poland and France, and the least in Ireland, New Zealand and Iceland.

Apart from looking at income tax and other payments, Taxing Wages compares the differences between the net take-home pay of employees, including any cash benefits from government welfare programmes, with the overall costs of that salary to employers. This “tax wedge” results from the combined effect of a range of policy instruments: personal income tax, employee and employer social security contributions, payroll taxes and cash benefits. It is therefore a more accurate reflection of the overall cost of hiring workers.

Single workers without children will find the tax wedge widest in Belgium, at 55.4% for those earning the average wage in services and manufacturing industries. The wedge was not much different in Germany, at 52.5%, and it stood at 51% in Hungary. This means that the average take home wage came to less than half of the total cost paid by their employers for hiring these workers.

Mexico is different. There, a single person without children earning the average wage faced a much thinner tax wedge of just 15%. The wedge was 18.1% in Korea. In other words, four-fifths of the employer’s costs of recruiting such wage-earners are in the form of actual wages.

For one-earner married couples with two children with average earnings, the tax wedge narrows further: from 42.8% in Turkey and 42.2% in Poland to as low as 2.3% in Ireland and 2.6% in New Zealand. This effectively means that for this category of worker, there is little difference in these countries between the cost of the employee to the firm and the net take-home wage. The average wedge for OECD countries was 27.5%.

A hot issue discussed in Taxing Wages concerns the tax treatment of minimum wages. A special chapter notes that 21 of the OECD’s 30 member countries have statutory minimum wages, and in just over half of these countries minimum wages have risen slightly faster than average wage levels in recent years. An exception is the US, where real earnings of workers on the minimum wage have dropped sharply. Social contributions and payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers.

Debate about the effects of a minimum wage often focuses on employment: for instance, does a binding minimum wage raise labour costs and lead to lower demand for workers, or does it boost demand for employment by raising consumption? The answer depends on labour market structure, the total cost of labour, productivity, and so on. However, the report underlines that employment is but one part of the minimum-wage issue, with distribution and fairness being other considerations. That said, the report also finds that the income tax and social contributions paid by minimum wage earners are considerable. In fact, social contributions paid by minimum-wage earners exceed income taxes in most countries and tend to be the main drivers of the overall tax burden.

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